Following the unveiling of the details for Ireland’s new auto-enrolment system earlier this year, Jack Gray assesses the framework, its aims, and whether the measures go far enough.

As the only OECD country without a mandatory or quasi-mandatory retirement savings system, Ireland is playing pensions catch-up with most of the developed world. The details of the new auto- enrolment (AE) system, which has been in planning since 2018, were announced in March.

From 2024, employees aged 23-60, and earning over €20,000, who are not already enrolled in an occupational scheme will be auto-enrolled into one. The Department of Social Protection (DSP), which is leading the development of policy and legislative design, estimates that around 750,000 workers will be enrolled into a new workplace scheme.

Contributions will start at 1.5 per cent for both employees and employers, with a 0.5 per cent top-up from the state, and will gradually increase to 6 per cent for employees and employers and 2 per cent from the state in 2034, up to €80,000 of earnings.

“The principle of a phased contribution rate is a good one,” argues Irish Life Corporate Business director of products, Shane O’Farrell. “We believe the gradual contribution rate increases are too slow, however, it is critical to start with something rather than nothing at all.”

The DSP predicts that the new system will account for approximately €21 billion in funds, excluding investment returns, after 10 years. Members can choose a preferred fund or be enrolled into a default fund, with a pot-follows- member approach to be adopted.

Seeking coverage

“Despite the considerable efforts of government and the pensions industry over many years, a good coverage level has not been achieved,” says a DSP spokesperson.

“If measures are not taken to address the low rates of supplementary pension coverage now, many future retirees will experience unwanted and severe reductions in living standards when they reach retirement. The department’s policy aim is for AE to reverse that long-standing trend.”

O’Farrell states that AE has delivered “fantastic results” in other countries and should be seen as a socially progressive and forward-thinking option for Ireland.

Furthermore, Irish Association of Pension Funds (IAPF) CEO, Jerry Moriarty, believes that the ambition of AE, particularly with total proposed contributions of 14 per cent, will go a long way towards achieving the DSP’s aim: “There are elements of the design that still need further clarification and the timelines proposed are ambitious. Providing a direct payment from the government, rather than tax relief, will complicate a pensions system that needs simplification.

“Phasing in the contributions allows employees and employers to plan and adjust to AE. With contribution levels of 6 per cent for employees and employers it would be very difficult to introduce those immediately without a significant impact on the cost of business and employees’ take home pay.

“However, if we want to have a system that provides coverage and adequacy it is also important that the staging of the contribution increases happen as planned.”

Central processing

As part of the system, a new body will be established to oversee the scheme and facilitate the pot- follows-member approach. The Central Processing Authority (CPA) will be established prior to the launch of AE on an administrative basis within the DSP.

“Once the necessary legislation is enacted, the CPA will be a statutorily independent agency, regulated by the Pensions Authority,” the DSP spokesperson explains. “However, in line with governance requirements, it is likely that the board of the CPA will be answerable to the Minister for Social Protection.

“The AE system and the CPA are designed to act in employees’ best interests and to minimise the administrative burden on employers.”

Moriarty notes that putting the infrastructure of the CPA together will “take time”, while Tor Financial Consulting managing director, David Harris, cites cost concerns.

“They’re saying it’s only going to cost €20 million, that is the budget,” Harris continues. “We estimated something more akin to €85 million. The positive is they’re looking at doing AE, but politically it’s a very aggressive timetable.”

Department expectations

Employers and schemes will have some adapting to do amid the new requirements, but the DSP states that that simplicity and efficiency are key elements of the AE design.Its spokesperson describes AE as a positive development for employers, as it levels the playing field in their efforts to attract talent to their companies.“It offers them a ready-made, easy-to-use pension scheme and is an important element in all employees’ well being,” they add. “AE provides employers with a well-designed, automated system, removing almost all of the administrative burden from them. The CPA operational processes will be based on automated IT infrastructure, via payroll applications, that will assess employee data and determine ifthe employee meets the eligibility criteria for AE.

“The employers’obligations in the AE system will simply be to: Apply a payroll instruction for employees, provided by the CPA; calculate, deduct and remit employee and employer contributions; and follow all compliance regulations set out in legislation. The CPA will consult with employers’ associations and providers of payroll systems and services to ensure smooth integration, safe execution and accurate processes.”

Potential shortcomings

Despite the potential positives, there are concerns that certain demographic groups could be worse off than others under the new system. In its submission to the initial consultation, the IAPF suggested that enrolling people as soon as they join the workforce was preferable to waiting until age 23.“Experiencing a drop in income at that age is likely to encourage opt-outs,” Moriarty warns.

“Combining multiple incomes that people have will also ensure people with multiple lower paid jobs will benefit by not being excluded. There are concerns that the eligibility criteria will disproportionately impact on women, but affordability is also an issue for the lower paid.”

O’Farrell echoes these concerns: “Irish Life believes the proposed new AE scheme could intensify the gender pensions gap, create more delay and expense in introducing the system and reduce the choice available to employees in Ireland.

“Limiting access to AE for people between the ages of 23-60 earning €20,000 will disproportionately exclude women and exacerbate the gender pension gap. The lack of flexibility to increase payments or make lump-sum contributions to cover any periods of unpaid leave or career gaps could mean worse retirement outcomes for women.”

Harris adds that the age and earnings thresholds are not very progressive: “What happens to all those lower income people? What happens to women who are 18, who maybe get married at 20 and then leave the workforce at 21? They won’t be covered.

“Are they encouraging voluntary contributions? Will they do it for the self-employed? The self-employed will still hurtle along but they won’t have the ability to do these one-person schemes like a SIPP structure, because the costs will dramatically increase.”

He also questions whether the system will be ready in time for the 2024 deadline. “They’re going to run out of political time as well as regulatory time.

“They’ve got to draw up some legislation. AE is admirable based on the OECD report of 2012 and that is fine. It’s the delivery or how it’s being implemented that provides us with concern.”

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